New Capital Accord

The New Capital Accord is fully dedicated to the banks' risk management and provides a basis for improving the banks' potentials to assess all types of risks they are exposed to in their operations. The establishment of the capital base under the new framework will be made in a manner that most precisely reflects the practices and the procedures of the banks for risk management, with a special attention being paid to the supervisory procedures and practices for monitoring and analysis of the above practices, as well as to the establishment of a market discipline by binding the banks to disclose data and information on the types of risks they are exposed to and the amount of capital base. The New Capital Accord consists of three main elements:

1. Pillar 1 - Minimum capital requirements - defines the basic components used to determine the capital adequacy: guarantee capital and risk weighted assets. The new capital framework requires changes in the manner of determining the risk weighted assets, while the manner of determining the guarantee capital remains the same as in the existing capital framework. The changes in the determination of the risk weighted assets include changes in the credit risk treatment and incorporation of the operational risk. With respect to the credit risk treatment, three options for calculating the capital base for covering such risk are given as followed: revised Standardized Approach, Foundation and Advanced Internal Rating Based Approach - IRB. The incorporation of the operational risk in the basis for calculating the capital base is one of the most essential innovations of the New Capital Accord. The operational risk is a very important risk the banks are exposed to, and therefore they should have an appropriate protection mechanism from the potential losses that might arise from this risk. Hence three different methodologies for including the operational risk in the capital base determination will be applied: basic indicator, standardized approach and internal rating. The conducted analysis indicates that by applying the new accord, the operational risk is expected to make up 20% of the determined level of capital requirement.
2. Pillar 2 - Supervisory review - defines the supervisory role in the monitoring and the analysis of the models of determining the capital adequacy applied by the banks.
3. Pillar 3 - Market discipline - defines the basic information and data of a public nature the banks are required to disclose on a regular basis.

Thus the new accord allows the banks to choose among several available options for adequacy capital calculation. This is probably the largest novelty introduced under the new capital accord. Taking into account the large difference among the banking institutions, from the aspect of their size and complexity, it is not possible to apply a framework which will be the same for each of them, or which will be equally efficient and applicable to all banks. Therefore, an approach has been proposed where different options are available to different banks, depending on their needs and willingness to invest in more sophisticated risk assessment systems.